Buying a Short Sale Property? What You Need to Know...
Friday, October 23, 2015
Short sales can represent interesting investment opportunities but keep in mind they are not a typical transaction. The owners will be getting exactly zero out of selling their home – but they might be preventing a foreclosure damaging their credit even more. The short sale lender will be getting less than the amount of the mortgage out of the sale – sometimes considerably less. You write up an Agreement of Sale, the sellers agree, but now the hurry up and wait game starts as you await the short sale lenders response/approval. Even so, there are things you need to know on the way in:
- You will have little or no control over the transaction and at times there will be frustratingly little information on what is happening. The short sale lender will only deal with the buyer or the buyer’s short sale negotiator. You, your realtor (we of course recommend The Robbins Team), or your attorney will not be able to get any information from them directly. You will need patience.
- Short Sale Purchases are not automatically a good deal. Sometimes it is amazing how difficult some lenders are at reconciling their valuation with real market value.
- The experience of the short sale negotiator is a factor. When they present a preliminary HUD-1 to the short sale lender it must be substantially similar to the final one. Home Owner Association dues and sewer/water bills, for example must be included. If unexpected expenses to the short sale lender come up shortly before settlement, they can kill the deal. There are several commercial entities in our area that specialize in short sale negotiations, but they normally charge around 3%. This fee is paid by the buyer (usually offset by including 3% settlement help in the contract of sale).
- Potentially there is very little seller motivation – they are not getting anything out of it.
- Short sale lenders can change the terms of the contract, but you, as the buyer, are not obligated to accept the changes – think of it like it’s a counter offer.
- Other offers can come in after yours has been submitted to the lender – creating an auction type situation – depending on which short sale lender is involved. You will have no recourse if the lender accepts another offer – unless you put in the contract wording that “Until this offer has been responded to, the seller will not consider any offers within the short sale approval period”. The problem is the buyer cannot back out until either the short sale lender rejects the offer or the short sale contingency date has passed. Some short sale lenders will strike such clauses.
- Some short sale lenders (Nationstar Mortgage is the only one I am aware of, but there could be more) will actually put your offer in an online auction for 2 – 3 months to see if they can get more money. I would also avoid Ocwen Financial.
- Under the home inspection contingencies “within 10 business days of short sale approval all utilities will be turned on” is a good clause to add for your protection. You want the utilities to be on for you home inspection.
- Be sure you understand that in spite of home inspections, the property is really being sold “As-Is”. Even though the contract might not say that, the home inspection is defacto “As-Is”. The seller will likely not do any work and the short sale lender practically never does. The main purpose of the home inspection is to find out what is wrong with the property and decide if you want to go forward. If you are getting an FHA or VA mortgage be aware they have no escape clause for repairs. There are times that buyers will have to do required repairs at their own expense in order to satisfy FHA or VA mortgage inspections. FHA and VA financing requires they must be done before settlement and they don’t allow escrows. If you are going to do repairs before settlement, be sure you have approval to do such and be aware that if you do not purchase the property, there is basically no recourse to recoup the repair investment.
- If the seller has a USDA mortgage, the USDA does not release the seller from a deficiency amount until after settlement in spite of the seller having a short sale approval from the bank.
- Settlement Statement Approval – the seller’s mortgage company can have different requirements as to how different expenses are shown on the settlement statement than how the buyer’s mortgage company wants the expenses shown. This can cause delays in settlement.
- Many times the seller must be delinquent on their mortgage before the lender will even consider a short sale. This can delay the process even further if you have to wait until the seller is delinquent for several months before starting the short sale process. Some lenders will even require the seller to go through a class before they can start the short sale process.
- Short sale lender approvals for people selling investment properties are much more frequently not approved.
- When the short sale is approved, the deficiency (the difference between what is owed by the seller and the amount the short sale lender will actually receive) can be an issue. It can go to the seller in 3 ways:
- Excused (Obviously seller preferred – though it can have tax consequences, where the IRS treats the deficiency as income, but congress passed laws that prevent that – but they haven’t been extended yet to cover 2015).
- A note (where the seller will make periodic payments to the short sale lender after settlement to cover some percentage of the deficiency).
- Left as an open issue (The short sale is approved but the short sale lender don’t say what happens to the deficiency – a somewhat scary situation for the seller)
- If it is a HAFA mortgage company, the process provides any 2nd mortgage holder must also approve the Short Sale.
- The settlement might never happen. The seller could abandon the deal. The buyer might find another property or run out of patience. The short sale might not be approved. A vacant property (especially one without power) could be damaged or vandalized.
By Tucker Robbins, Berkshire Hathaway HomeServices
(302) 777-7744 | Tucker@RobbinsRealEstate.com
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